Details of Kuwait’s 2001-02 national budget, approved on 27 June, have now become available for public scrutiny with the publication of disaggregated figures in the official gazette, Kuwait al-Yaum, on 29 July which reveal conservative spending (still dominated by capital rather than current expenditures) despite potentially two years of healthy surplus. The figures confirm that the government projects annual spending for the year of KD5,274mn ($17,179.2mn) on the back of revenues of KD3,831.5mn ($12,480.5mn), thereby creating a deficit (after a 10% allocation to the Reserve Fund for Future Generations – RFFG) of KD1,825.7mn ($5,946.9mn – see Table below). On an annualized basis, the spending projection represents a 10% increase over the previous year, while revenues are estimated to rise by 25%. (The previous year’s 2000-01 budget was based on a nine-month period so that a new fiscal year could be adopted running from 1 April to 31 March, as is now the case – MEES, 11 September 2000.) 

Notable line item increases in spending (in annualized terms) include a 21% rise at the Comptroller, a 21% increase at the Amiri Diwan, a 34% rise at the Ministry of Civil Service, a 321% rise at the General Administration of the Ministry of Finance, a 35% increase at the Secretariat and a 30% rise in the allocation for the National Council for Culture, Arts and Literature. Other than these increases, the overall spending pattern has remained broadly the same and is significantly outstripped by the projected increase in revenues. Moreover, the net deficit in annualized terms is 9.7% less than the previous fiscal year, even though oil revenues are likely to fall slightly in the current fiscal year. 

At the time of the budget’s approval, local analysts voiced their now habitual refrain that the underlying oil price assumption (in this case $15/B) was conservative, that the projected deficit was therefore unlikely and that Kuwait could in fact achieve a fiscal surplus in the current year if oil prices exceed an average figure of $22/B, which seems a likely scenario. The actual figures for the fiscal year 1999-2000 (published at the same time in the official gazette) add weight to this argument. In the official budget for FY1999-2000, total revenues were put at KD2,224mn ($7,244.3mn), whereas the actual figures released this year show that gross revenues in closed accounts totaled KD5,241mn ($17,071.7mn) representing a 136% under-estimation.  

Figures for actual expenditures are not published in the gazette, but according to the National Bank of Kuwait’s (NBK’s) Economic & Financial Review, (April 2001) , spending in FY1999-2000 dropped by 4% to KD4bn ($13bn) and thus “the surplus before allocation to the RFFG was KD1.24bn, and KD707mn after the allocation,” as compared to the projected deficit of KD2,224.4mn ($7,245.6mn). NBK goes on to say that sustained oil prices in the subsequent FY2000/2001 are likely to lead to a KD1.7bn ($5.54bn) surplus for the nine-month period and an annualized figure of KD2.3bn ($7.5bn), “making it the largest surplus in 20 years when investment income is excluded from past budget revenues as is the practice at present.”  Already in the first six months of FY2000-2001, according to NBK, total revenues were 53% higher than in the previous year, and with spending at KD1.6bn ($5.2bn), the budget surplus more than doubled to over KD1.9bn ($6.2bn) or KD1.6bn ($5.2bn) after the allocation to the RFFG. The report notes that the increase in revenues stemmed from “a 26% increase in the average price of Kuwaiti crude to $26.6/B and a 16% increase in average production…[which] boosted oil revenues by 57% to over KD3.3bn from KD2.1bn.” A contributing factor has also been the government’s tight control of spending, which according to NBK remained “well below the growth projected in the official budget” for the first six months of FY2000-2001. 

As NBK points out, reduced spending has become a pattern in recent years – even the latest budget sees only a modest increase – despite continuing calls from the private sector for a boost to economic activity. Since the beginning of the year, local corporates and banks have been complaining that a lengthy period of high oil prices has failed to translate into more aggressive economic activity  (MEES, 12 February). NBK notes that despite a 57% rise in oil sector GDP in 2000, growth in the non-oil sector slowed to the lowest rate since liberation. This was the result of “weakening domestic demand due in larger part to a big drop in investment spending and slower growth in private consumption.” Moreover, “constrained government outlays have lowered activity in the construction and contracting sector, reduced imports of capital and intermediate goods, and depressed growth in the service and trade sectors.” However, NBK is optimistic that as of next year the government will initiate a series of new large public and oil sector projects, which “given the dominance of the public sector…should be a boon for the private sector.” 

Kuwaiti Budget 1998-2002

(KD'000)

On the reform front, though, fiscal comfort, solid nominal GDP growth in 2000 of 27.7% to reach KD11.6bn ($37.8bn), strong liquidity (boosted in part by UN compensation claims – MEES, 4 June) and the prospect of solid if not high oil prices all mean that the now infamous Kuwaiti reform agenda is likely to remain on the political backburner. (The Kuwaiti parliament is currently in recess.) NBK is quick to make this point. “The risk of continued complacency in pushing for reforms remains high, especially since high oil prices promise another budget surplus next fiscal year and the country’s reserves are perceived to be fast approaching their pre-invasion level.” The government subsequently announced that it had established a Committee for Economic Reform headed by the country’s Foreign Minister, Shaikh Sabah al-Ahmad, and more recently spoke of introducing corporate taxation for local firms. Finance Minister Yusif al-Ibrahim announced on 27 June, following the approval of the budget, that the government has proposed to introduce a 5% tax on local firms and a sales tax on some imported consumer goods in an attempt to “reconstruct the Kuwaiti economy.” But he confirmed that such measures would not impact the current fiscal year.  

In its latest Public Information Notice (PIN) on the country issued on 29 June, the International Monetary Fund (IMF) acknowledged that Kuwait’s reform process has advanced since late 2000, citing labor market reform (May 2000), foreign portfolio investment laws (September 2000) and foreign direct investment (March 2001). It also noted that the government has increased the fees and charges on government-provided services and is set to introduce a privatization law and reform corporate income tax law and company law. The IMF commended the formation of the Committee for Economic Reform but emphasized that it should expedite preparatory work and build broader support for the proposed reform package and called on the authorities to improve outstanding legislation.  

Specifically, the IMF said that the government should restrain fiscal spending in the 2001-2002 budget, while acknowledging that increased capital expenditure could be warranted following cutbacks in recent years. But it said the government should persevere with the medium-term objective of restructuring the budget and pursuing structural reforms. In particular, the IMF noted that the growth of the wage bill should be curtailed, the civil service should be streamlined and expenditure on subsidies and transfer should be reduced. The IMF “called for further efforts to diversify the revenue base, including the elimination of import duty exemptions on a wide range of products, the introduction of a broad based consumption tax and the levying of excises on luxury items.” 

Kuwaiti Budget 1998-2002 (Cont’d)

(KD'000)

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Source: Kuwaiti Official Gazette, Kuwait al-Yaum (29 July 2001)  

© Copyright MEES 2003.